NESTLE vs. COURT OF APPEALS G.R. No. 86738 November 13, 1991

 

NESTLE PHILIPPINES, INC., petitioner, vs.  COURT OF APPEALS and SECURITIES AND EXCHANGE COMMISSION, respondents.  G.R. No. 86738 November 13, 1991

 

FACTS:

On February 21, 1983, the Authorized Capital Stock (ACS) of petitioner Nestle was increased from P300 million divided into 3 million shares with a par value of P100 per share, to P600 million divided into 6 million shares with a par value of P100 per share. Nestle underwent the necessary procedures involving Board and stockholders approvals and the necessary filings to secure the approval of the increase of ACS. It was approved by respondent SEC.

Nestle issued 344,500 shares out of its previously authorized but unissued capital stock exclusively to its principal stockholders San Miguel Corporation and to Nestle S.A. San Miguel Corporation subscribed to and completely paid up 168,800 shares, while Nestle S.A. subscribed to and paid up the balance of 175,700 shares of stock.

 

In 1985, petitioner Nestle filed a letter to SEC seeking exemption of its proposed issuance of additional shares to its existing principal shareholders, from the registration requirement of Section 4 of the Revised Securities Act and from payment of the fee referred to in Section 6(c) of the same Act to wit: 

 

“Sec. 6. Exempt transactions. — a) The requirement of registration under subsection (a) of Section four of this Act shall not apply to the sale of any security in any of the following transactions:    xxx xxx xxx

 

(4) The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus; or the issuance of securities to the security holder or other creditors of a corporation in the process of a bona fide reorganization of such corporation made in good faith and not for the purpose of avoiding the provisions of this Act, either in exchange for the securities of such security holders or claims of such creditors or partly for cash and partly in exchange for the securities or claims of such security holders or creditors; or the issuance of additional capital stock of a corporation sold or distributed by it among its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale or distribution of such increased capital stock.”

 

Nestle argued that Section 6(a) (4) of the Revised Securities Act embraces “not only an increase in the authorized capital stock but also the issuance of additional shares to existing stockholders of the unissued portion of the unissued capital stock“.

 

SEC denied petitioner’s requests and ruled that the proposed issuance of shares did not fall under Section 6 (a) (4) of the Revised Securities Act, since Section 6 (a) (4) is applicable only where there is an increase in the authorized capital stock of a corporation.

 

MR was denied and appeal to CA was also denied. Thus this Petition for Review.

 

ISSUE: WON petitioner Nestle’s application for exemptions should be granted.

 

RULING:

 

No. Under Sec 38 of the Corporation Code, a corporation engaged in increasing its authorized capital stock, with the required vote of its Board of Directors and of its stockholders, must file a sworn statement of the treasurer of the corporation showing that at least 25% of “such increased capital stock” has been subscribed and that at least 25% of the amount subscribed has been paid either in actual cash or in property transferred to the corporation. The corporation must issue at least 25% of the newly or contemporaneously authorized capital stock in the course of complying with the requirements of the Corporation Code for increasing its authorized capital stock.

 

After approval by the SEC of the increase of its authorized capital stock, and from time to time thereafter, the corporation, by a vote of its Board of Directors, and without need of either stockholder or SEC approval, may issue and sell shares of its already authorized but still unissued capital stock to existing shareholders or to members of the general public.

 

In the case at bar, since the 344,500 shares of Nestle capital stock are proposed to be issued from already authorized but still unissued capital stock and since the present authorized capital stock of 6,000,000 shares with a par value of P100.00 per share is not proposed to be further increased, the SEC and the CA correctly rejected Nestle’s petition.

 

When capital stock is issued in the course of and in compliance with the requirements of increasing its authorized capital stock under Section 38 of the Corporation Code, the SEC examines the financial condition of the corporation, and hence there is no real need for exercise of SEC authority under the Revised Securities Act. Thus, one of the requirements under the current regulations of the SEC in respect of filing a certificate of increase of authorized capital stock, is submission of “a financial statement duly certified by an independent CPA as of the latest date possible or as of the date of the meeting when stockholders approved the increase/decrease in capital stock or thereabouts. When all or part of the newly authorized capital stock is proposed to be issued as stock dividends, the SEC requirements are even more exacting; they require, in addition to the regular audited financial statements, the submission by the corporation of a “detailed or Long Form Report of the certifying Auditor.” Moreover, since approval of an increase in authorized capital stock by the stockholders holding 2/3 of the outstanding capital stock is required by Section 38 of the Corporation Code, at a stockholders meeting held for that purpose, the directors and officers of the corporation may be expected to inform the shareholders of the financial condition and prospects of the corporation and of the proposed utilization of the fresh capital sought to be raised.

 

On the other hand, issuance of previously authorized but theretofore unissued capital stock by the corporation requires only Board of Directors approval. Neither notice to nor approval by the shareholders or the SEC is required for such issuance. There would be no opportunity for the SEC to see to it that shareholders (especially the small stockholders) have a reasonable opportunity to inform themselves about the very fact of such issuance and about the condition of the corporation and the potential value of the shares of stock being offered.

 

An issuance of previously authorized but still unissued capital stock may be held to be an exempt transaction by the SEC under Section 6(b) so long as the SEC finds that the requirements of registration under the Revised Securities Act are “not necessary in the public interest and for the protection of the investors” by reason, inter alia, of the small amount of stock that is proposed to be issued or because the potential buyers are very limited in number and are in a position to protect themselves.

 

Petitioner Nestle’s second claim for exemption is from payment of the fee provided for in Section 6 (c) of the Revised Securities Act. Petitioner claims that to require it now to pay one-tenth of one percent (1%) of the issued value of the 344,500 shares of stock proposed to be issued, is to require it to pay a second time for the same service on the part of the SEC.

 

We think it clear that the fee collected in 21 February 1983 by the SEC was assessed in connection with the examination and approval of the certificate of increase of authorized capital stock then submitted by petitioner. The fee, on the other hand, provided for in Section 6 (c) which petitioner will be required to pay if it does file an application for exemption under Section 6 (b), is quite different; this is a fee specifically authorized by the Revised Securities Act, (not the Corporation Code) in connection with the grant of an exemption from normal registration requirements imposed by that Act. We do not find such fee either unreasonable or exorbitant.

 

WHEREFORE, Petition for Review on Certiorari is hereby DENIED for lack of merit.